Tips You Need to Know Before Investing in Commercial Real Estate

partnership-526413_1920Most people start their real estate career investing in residential properties. Some eventually look to commercial investing because it is much more profitable. Before you jump into commercial real estate there is very different information you need and a different approach compared to residential investing.

Six Tips to Get You Started in Commercial Real Estate

  1. Commercial real estate is valued differently than residential. Residential properties derive their value based on recent comparable sales of similar properties in the neighborhood. The value of commercial property is determined based on cash flow. Two buildings, each with 6,000 square feet and located on the same downtown block will have different asking prices. A single tenant small grocery store will have less cash flow than a four tenant office building for attorneys and CPAs.
  2. Market and sector knowledge is critical to your success. If you have personal knowledge about a particular commercial sector, stay with that sector. If you have no knowledge about a sector, gain the knowledge you need before investing. Even if you’re only the landlord, you don’t want to invest in a hotel if you don’t know anything about the hospitality industry. Same thing with the manufacturing sector. You don’t want to own an industrial strip if you don’t know the best use of the property to maximize cash flow.
  3. Different formulas are used in commercial real estate investing. Along with sector knowledge, you need to learn new profit and loss formulas before investing in commercial properties. In residential you may have only bought properties for 75% of after repair market value or rentals that cash flowed 20% above expenses. In commercial real estate, you need to understand cap rates, net operating income, and loan to value ratios. They’re not difficult but you need to fully understand what each means and how they affect your profitability.
  4. Patience is a virtue when investing in commercial real estate. You don’t always want to invest in whatever is currently on the market just because you have the money. First, you want to determine what you want to invest in based on tip 2 above. Next, build a network of professionals involved in the type of investment you want to make. Finally, wait for the right property to come along at the right price based on the formulas in tip 3.
  5. Consider the long term impacts before investing. Beside the immediate cash flow, you need to understand what is likely to happen to commercial real estate in the surrounding area in the coming years. Is it located in a city where the core infrastructure has been neglected for years? If so, businesses will slowly begin locating elsewhere in the years ahead. Look at things such as a major employer in the area struggling financially and it’s becoming questionable if they will survive. Look at the tax base of the community. Has it consistently been declining along with associated services?
  6. Don’t put all of your eggs in one basket. If you’ve had success as a residential investor, keep some on your holdings in residential. The commercial and residential sectors don’t always run in the same business cycle. Whether investing in stocks and bonds or real estate, smart investors always strive for a diversified portfolio.

Commercial real estate is a great way to invest to become wealthy and can provide a passive income stream for retirement. Following these commercial investing tips and building a strong network greatly increases your chances at success.

Author: Brian Kline

Original article can be viewed at: http://realtybiznews.com/tips-you-need-to-know-before-investing-in-commercial-real-estate-2/98730348/

Breaking down the ‘good old boys’ club’ in commercial real estate

women in commercial real estateCommercial real estate has long had a reputation for being a “good old boys’” sort of world, in which men dominate deal-making, development and construction. But growing numbers of women in top leadership positions are aiming to change that, and help their female colleagues advance.

That resolve was on display this week at a discussion hosted by the Urban Land Institute’s Charlotte chapter about the state of women in the real estate industry. New research from ULI shows that women make up just one in seven chief executives of firms among its membership.

“In our industry, we’re still incredibly underrepresented,” said Ellen Mendelsohn, ULI’s Washington, D.C.-based director of leadership. “Women aren’t capturing their fair share of leadership roles…There are hardly any women getting to the top running these large corporations.”

The solutions proposed by ULI are a mix of structured programs and more intangible changes to company culture. But ULI found that informal programs, such as giving women challenging and visible jobs and including them in discussions, are often more effective at helping women advance than formal programs such as starting an employee group for women or giving leadership training.

Pat Rodgers is president and CEO of Rodgers Builders, one of the largest construction firms in Charlotte, and she’s arguably the most prominent female executive in the city’s development scene. In an interview with the Observer, she said the increasing emphasis of attracting female students to technical fields such as engineering and construction is helping to shift the balance.

“I think it is beginning to change in our industry,” said Rodgers. “We don’t have as many female interns as we do male interns. But we didn’t used to have any.”

She also said it’s important to have more diverse viewpoints within a company to cope with an ever more rapidly changing economy.

“I think it makes you think differently. If everybody’s thinking the same way, there’s nothing gained from that,” she said. “You don’t change, and that’s deadly.”

Of course, it’s not just commercial real estate where women are underrepresented. Many companies from the Fortune 500 on down are dominated by men, an issue highlighted in recent years by the popularity of books such as Facebook COO Sheryl Sandberg’s “Lean In,” exhorting women to take a more aggressive role in advancing their careers.

One particular factor ULI noted is that many real estate firms are privately held, family enterprises in which top leadership positions pass from father to son. Prominent Charlotte firms, such as Lincoln Harris, Grubb Properties and Levine Properties now have sons running firms their fathers started.

Last year, ULI surveyed its female members nationwide to assess how their careers stack up. While there’s plenty of data about female leaders in large, publicly traded companies, there’s much less available about commercial real estate firms, many of which are smaller and privately held. The survey found:

▪ Women make up 25 percent of ULI’s membership, but only 14 percent of CEOs in the group.

▪ Among those female CEOs, woman-run companies tend to be smaller: Only 7 percent lead a company with 100 or more employees, while about a quarter are sole proprietors and half lead a company with two to 20 employees.

▪ Still, the majority of women said they were on track to reach their goals for leadership roles in the industry: About 71 percent of women surveyed said their career was either advancing at the pace they expected or more rapidly, with 29 percent saying their career pace is “lagging my expectations.”

The only woman in the room
At Thursday’s panel discussion at the Charlotte Country Club, some of the women recounted experiences where they were the only females in a business meeting. Ellen Rogers recalled such experiences from before she joined Bank of America, where she is a senior vice president of community development.

“I’ve been in very large rooms where I was the only woman there,” she said. “I’ve been to golf outings where I was the only woman there.”

That can make it hard for younger women to picture themselves in the C-suite.

“If there’s not a role model, it’s really hard to envision, starting out, how you get there,” she said.

But, they said, that needs to change for firms to stay competitive as real estate becomes more global and less provincial. Richard Petersheim, of LandDesign, said teams with women tend to produce better designs and are often more creative. Andrea Howard, a senior vice president with real estate brokerage JLL, said the company’s internal research showed that 55 percent of the company’s top deal-making teams last year were “diverse,” including women or minorities.

Howard said the growing importance of capital from outside of Charlotte means there is more of a need to have diverse development teams working on real estate projects. For example, she cited a J.P. Morgan acquisitions team based in New York that is now almost entirely female.

“A lot of that equity is coming from outside Charlotte. You’ve got to have that kind of diversity to attract capital,” she said.

The panelists also encouraged women to be assertive as they promote themselves and their careers. Howard said she had seen a difference in how young men and women at JLL approached a mock pitch to win a client. The men all promoted themselves more aggressively.

“Without exception, every man that got up there…said ‘I,’” said Howard. Women, on the other hand, promoted the organization as a whole and pitched themselves as a smaller part of a bigger team. “Every woman, and there were five of them, not one of them said ‘I’ or ‘me.’”

Marcie Williams, president of apartment management and development firm Rivergate, said many of today’s large real estate companies grew up in the 1970s and 80s, when men were more likely to be in charge. She said she hopes that as more woman-led firms start to grow now, the gap at the top of the corporate pyramid shrinks.

“My hope is in the next 20 or 30 years, there won’t be such a dynamic,” said Williams.

Rodgers told the Observer her advice would be the same for employees early in their career, regardless of gender: Start at the bottom and work hard.

“At the end of the day, hard work is hard work and talent is talent,” she said. “End of story.”

Author: ELY PORTILLO
elyportillo@charlotteobserver.com

Original article can be viewed at: http://www.charlotteobserver.com/news/business/biz-columns-blogs/development/article57252128.html

Guest Blog: Commercial Leases – Reading them may be painful but not reading them can be worse

Commercial Leases - Hollywood FloridaIn all the years I’ve represented Landlords and Tenants it never ceases to amaze me how few Tenants actually understand what’s in their lease. While I can’t really address every issue that I think a Tenant should pay attention to here, I would point out a few of what I consider to be the most important:

  1. Operating Expenses – Most leases require a Tenant to reimburse for some portion of Operating Expenses.  Understanding how that term is defined is critically important.  Some leases include “management fees” or may include capital expenditures.  You’ll want to try to negotiate a cap on Operating Expenses and/or limit them to items outside of the Landlord’s control.
  2. Relocation Rights – Leases often provide that a Landlord has a right to move a tenant to another location.  We recommend that this be limited, removed or that at least the Tenant have a right to terminate.
  3. Personal Guaranties – Personal Guaranties don’t necessarily have to cover the entire lease term.  Try limiting it to a number of months or to a maximum number to bring certainty to potential downside.
  4. Renewals – Avoid renewal provisions that don’t have clearly defined rent or clearly defined mechanisms for calculating rent.  The uncertainty regarding renewal rent may effectively leave a Tenant with a renewal option that really isn’t much an option at all.
  5. Assignment and Subletting – Consider negotiating this to be subject to Landlord’s reasonable discretion instead of their unfettered discretion.

The best advice that I would give someone preparing to sign a long term lease is to seek the advice of a competent and experienced real estate attorney.  The value that his/her advice can bring you will dwarf the cost over the long term of your lease.


Eric A. Jacobs is a partner with the real estate focused law firm Nexterra Law.  Eric serves clients through the State of Florida on all matters relating to real estate including litigation.  The above is intended  for informational purposes only and is not intended to constitute legal advice.

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If you Sell your Business, Should you Keep the Commercial Real Estate?

puzzle-guy300The Background: I provide real estate advice to owners of commercial property in Hollywood and Hallendale, Florida. Frequently, this advice results in a company buying a building to occupy. With prices notching up but with cheap financing, this in many cases can result in a rental rate cheaper than a market rental rate.

The rental rate I am referencing is the debt service achieved when applying the purchase price financed at today’s low interest rates. When an ownership structure involves the owners of the business that will occupy the real estate – a terrific union is formed. The company pays the rent (debt service), and the owners benefit from the appreciation, depreciation, and stability of facility costs. What happens if the owner decides to sell the company (tenant)? Should the real estate be retained?

The Misconception: When the owner of the company and the occupant of the real estate are identical – but defined by entity – the owner of the real estate controls the decisions of the tenant – length of lease, annual increases in rent, tenant improvements considered, etc. When an owner of a company decides to sell the company (tenant) and retain ownership of the real estate some misconceptions occur.

  • The new tenant will run the business the same as the original owner
  • The new tenant will decide to stay in the real estate for many years
  • The new tenant will pay rent in a timely manner
  • The new tenant will care for the real estate the same way as the original “tenant”

While owning commercial real estate and the company that occupies the commercial real estate may prove to be a sound financial decision, owning commercial real estate while not owning the company may not be as sound. As an example, I encountered a private company that purchased a 38,000 square foot building for their use. The company occupied the building for eight years until the owners decided to sell the company. The owners retained the commercial real estate and signed a five year “leaseback” with the new owners of the company. The owners of the commercial real estate enjoyed a nice cash flow for five years. At the end of the five years, however, the company decided to vacate the building and relocate to a facilty in another state. The owner of the commercial real estate was now forced to compete with other owners of 38,000 square foot buildings – in many cases better capitalized – to secure a new tenant. The owner could not secure a tenant and the owner was forced to sell the building in an undesirable dip in the real estate cycle.

The Solution: We advise many owners in this situation to write a new lease with the acquiring company and then sell the building as a leased investment to an owner whose core assets are similar. We then suggest reinvesting the proceeds of the building sale through a tax deferred exchange into an asset class with less risk…IE a multi tenant project OR simply paying the tax on the proceeds and investing in a non-real estate asset.

Thanks to Allen Buchanan

5 Major Advantages Commercial Space Has Over Residential Property

Longer Term of Lease

For the most part, residential leases are for 1 year, with the tenant getting an option to renew for another year or go month to month. Some residential landlords can get a 2 or 3 year lease, but it is much less common. It’s much more common to see a lease that expired a while ago and is now in month to month status, meaning the tenant can move on very quickly.

Commercial leases rarely have 1 year terms because that’s not beneficial for the landlord or the tenant. The tenant wants a long lease, as they want to lock in their overhead expenses over a longer period. If they are a retail tenant or someone who gets visitors, the location and locking it down long term are even more important. Landlords benefit from long term leases as well, of course. An added benefit is that banks look very favorably on long term leases when they consider you for a refinance.

Lucrative Rent and CAM Charges [Read more…]

In Today’s Market, Zero Cash Flow Makes Sense

One of the least understood types of real estate structure in the net lease market today is a zero cash flow property.  Put simply, it is a highly-leveraged property backed by a long-term, bond-quality lease guaranteed by an investment-grade credit tenant. The tenant of the property is typically on a lease of 20 years or more, and has a credit rating of at least BBB.  The result is a lender is comfortable with monetizing the entire rent stream, so that the financing amounts to as much as 85 to 90 percent loan to value. The term “zero cash flow,” or “zero” as it is sometimes called, refers to the fact that all of the property’s net operating income goes to service the underlying loan, and there is none remaining to be distributed to the owner. This might not sound attractive to all investors, but a property with this structure does have its benefits. [Read more…]

How Commercial Real Estate Is Going To Be Totally Different Going Forward

Commercial real estate has a tremendous influence on workers but is also reactionary to how people want to work, play and shop.

To get a sense of where the market is headed, CNBC asked a number of experts what they thought the future holds.

Some of the predictions are in line with what others have been saying for some time, while others go against the grain.

Here are some of the things they shared: [Read more…]

Top 80 US Real Estate Crowdfunding Sites Open New Doors in 2015

The evolution of crowdfunding as a new investment vehicle in the US real estate industry has been remarkable in the past few years. Since the JOBS Act was passed into law in 2012, platforms specializing in crowdfunding real estate projects have mushroomed across the country.

Today, platforms offering innovative services to their clients dot the industry landscape. With differences in the type of instrument (debt or equity) offered to clients, type of services offered, and minimum amounts allowed as investment, these unique platforms have succeeded in bringing crowdfunding into the mainstream of real estate investing. [Read more…]

10 Biggest Mistakes when Analyzing Rental Properties

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Why Commercial Real Estate Deserves a Place in Your Portfolio

commercial_Commercial real estate can provide many benefits to investors, but it’s only with crowdfunding that these opportunities have become more accessible to individual investors. We’ll discuss here some of the benefits of this asset class.

Cash Flow
Investments can produce both current income and appreciation (value changes). The better crowdfunding companies often focus on properties producing current income — cash flow – because it’s believed that stable income can provide some degree of protection during periods of stress in the financial markets. Real estate is different from stocks in this respect – the income component accounts for a much larger portion of total returns than it does for stocks, for example. [Read more…]